Image: Lutz Schubert / Protocol

Can subsidies help the U.S. chip industry soar?

Protocol Index

Hello! This week: Unity's CFO talks us through the company's unusual IPO, the debate over U.S. chip manufacturing subsidies, and the lowdown on the influx of IPOs.

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  • "Coming out of recession, there's usually a bit of catch-up to do and the cost of capital tends to be cheap." — Morgan Stanley's Graham Secker explained the current rush in M&A, with the deal total set to hit $2 trillion for the year.
  • "Long U.S. tech [is the] most 'crowded trade' of all time." — That's according to Bank of America's latest Fund Manager Survey, which also found that investors think we're in a new bull market.
  • "It's complete nonsense … I wanted to bring along the group of investors that we wanted, and I didn't want to push them past the point where they really started to squeal." — Snowflake's Frank Slootman dismissed people's concerns that the company's massive IPO pop was a problem.
  • "I absolutely think it's a necessity — if you don't have it you're at a huge disadvantage." — NGP Capital's Upal Basu told me that he thinks tools like NGP's new AI deal-sourcer will become table stakes for the venture capital industry.

The Big Story

Unity's unusual IPO

When Unity IPO'd today, it popped. But it popped less than some other stocks — around 30%, a far cry from Snowflake's 112% surge earlier this week. That might have more to do with its unusual IPO than tepid demand, though.

When it came to listing, Unity wanted "to be different," CFO Kim Jabal told me after the stock began trading today. "We like to innovate." Specifically, the company wanted to take a "data oriented" approach.

  • "We asked investors to give us their interest at different prices in different quantities specifically," Jabal said, a far cry from the typical banker-led process in which demand is … guessed.
  • "We had 100% visibility into the demand curve of what investors were willing to pay," she added. "We just had such better information in this process, such better visibility."

The method seems to have been inspired by Google's dutch auction: Jabal worked at Google at the time, and Lise Buyer, one of the architects of Google's IPO (who we spoke to the other week), advised Unity. But Unity didn't use an auction: Instead, it handpicked its final price. "We wanted to sort of evolve the process," Jabal said. "We felt that this was sort of a balance … so it's not so scientific and perfect down to the, you know, totally machine based. We wanted to have some discretion over who are the right partners for us going forward."

  • Those partners, Jabal said, were happy with the process. "Some of the bigger names that we are happy to have in our stock, including Fidelity International and other big mutual funds, came in early, came in strong with their real indication."
  • The bankers were supportive too, she said: "Credit Suisse embraced this from the beginning, and they have been amazing partners to us. Goldman Sachs built out the software platform, and so they have been great partners as well."

Jabal wouldn't say if Unity picked the process with the hope of reducing a pop. "I can't really comment," she said. "I will just reiterate that we were looking for the best outcome from a financial perspective … so you can, I guess, draw your own conclusions."

  • This wasn't the only process Unity considered: "We thought very seriously at one point about a direct listing," Jabal said. "I think it's a great option for companies that are not looking to raise money, but we were looking to raise capital."
  • That lends credence to the expectation that the NYSE and Nasdaq's proposals to allow capital raises in direct listings could be immensely popular.

Unity also ditched the standard lockup period. Employees were allowed to sell 15% of their stock today, as opposed to having to wait the usual six months. That's because Unity wanted to make sure employees were able to benefit from the value they've helped create, Jabal said.

  • Those same employees will now have to help Unity pull off its large ambitions: continuing to grow its gaming business, while expanding into other verticals like architecture and film production.
  • "It's an interesting challenge when we think about where to invest," Jabal said.
  • By the sounds of it, the company's focused on R&D investment that will benefit both segments: "Fundamentally, the core investments we're making to make the product better apply both to gaming and other industries."

For now, Unity has to settle into its new life as a public company. That's not something Jabal was too worried about. "I am excited about the discipline that financial markets will bring," she said.



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Up to Speed

  • Monday: Nvidia bought Arm for $40B. Verizon bought TracFone for $7B. Klarna raised $650M at a $10.6B valuation. Dream Sports raised $225M at a reported $2.5B+ valuation. Airtable raised $185M at a $2.58B valuation. Ahead of its IPO, GoodRx raised $100M from Silver Lake and bought Scriptcycle for $60M. Allegro filed for a $266M IPO. Gojek and Grab were reported to be considering a merger. Alibaba was reported to be in talks to invest $3B in Grab. Carlyle and SoftBank were reportedly on the waiting list to invest in Reliance Retail.
  • Tuesday: Adobe earnings beat expectations. Opendoor announced it's going public via Chamath Palihapitiya's SPAC. dLocal raised $200M at a $1.2B valuation. Apple announced a services bundle.
  • Wednesday: Snowflake shares doubled on its trading debut. JFrog's shares jumped 47% on its debut. Hut Group shares jumped 27% on its debut. Flipkart was reported to be planning a 2021 IPO at a $45B+ valuation. Sennder bought Uber's European freight business, reportedly for less than $1.1B. Pure Storage bought Portworx for $370M. Zwift raised $450M at a reported $1B+ valuation. Alibaba and China Mobile were reported to be considering a $443M investment in Dahua. SoftBank and Naver said they'd take Line private via a squeeze out. The Fed suggested rates would stay near-zero for the next three years.
  • Thursday: Happiest Minds shares doubled on its debut. Sumo Logic shares soared on its debut. Amwell shares soared on its debut. Nuvei shares soared on its debut. XL Fleet was reported to be going public via a SPAC. TikTok was reported to be planning an IPO. LoanDepot was reported to be planning an IPO at a $12B valuation. Kuaishou was reported to be planning a $5B IPO. JD Health was reported to be planning a $1B IPO. LG Chem said it would spin off its battery business into a wholly-owned subsidiary. Affirm raised $500M. Uber was reported to be planning a sale of some of its Didi stake.
  • Today: SoftBank sold Brightstar. Ericsson bought CradlePoint for $1.1B. Chime reportedly raised $485M at a $14.5B valuation. Scopely was reported to be raising $200M+ at a $3B valuation.

Diving Deeper

Do chip manufacturers need government subsidies?

The chip industry wants your money. Well, sort of. In a paper published this week, the Semiconductor Industry Association made the case for increased government subsidies, arguing that they're necessary to ensure the U.S. share of global chip manufacturing doesn't decline more than it already has.

Subsidies always raise big questions: Why should taxpayers bail out industries that can't make a profit by themselves? That might be particularly true for the U.S. chip industry, where part of the problem is the slow adoption of the foundry model and Intel's failures.

  • But SIA CEO John Neuffer told me that the problems are bigger than that. Chip manufacturing is "a very uneven playing field," he said, thanks to foreign government subsidies.
  • The paper found that the total cost of ownership of an advanced logic fab in the U.S. is almost 30% higher than in China, with government incentives accounting for 67% of that difference.

Legislation proposed by the SIA would seek to address that imbalance, with a big program of government spending to help make it more affordable for companies to build a fab in the U.S. The SIA's Jimmy Goodrich said the organization is agnostic about how that money's used, but thinks "everyone knows the priority, firsthand, is in logic foundry … because that's frankly the most gaping hole in the U.S. supply chain."

Neuffer sought to address some of the biggest criticisms of the plan. "There's this concern that it's a race to the bottom with subsidies," he said, referring to the idea that China and the U.S. could keep upping subsidies ad infinitum. "Well, that race began 20 years ago, and we're still standing at the starting line saying 'Gee, I wonder if we should get into the race.'"

But some people still don't see the point of the subsidies. The Cato Institute's Scott Lincicome, who has written on the subject, told me that "the industry is really not in some sort of dire state of disrepair in need of a massive injection of government capital." China, he said, isn't getting good returns on its subsidies, while Intel is "long term … still in a great position." He argues that the high levels of investment made by U.S. semiconductor companies is testament to the lack of need for government subsidies.

  • "Good old U.S. free markets and, of course, global capital markets, have allowed the United States industry to remain strong, if not … globally dominant, without the need for government subsidies," he said.
  • Lincicome worried that subsidies might morph into protectionism, and points to the Sematech-DRAM efforts in the '80s and '90s as evidence that they might not even be effective.

It might be worth the risk, though. Though the SIA's main arguments for boosting U.S. manufacturing concern national security and supply chain resilience, there could be some economic upside too. When modeling scenarios in which the U.S. provided $20 billion or $50 billion in subsidies, the SIA found that "the U.S. government would make the money 'back' in terms of tax revenue," the SIA's Jimmy Goodrich told me.

But subsidies are no silver bullet. The SIA paper says those incentives would make the U.S. the most attractive semiconductor investment destination with one crucial caveat: "excluding China."

  • Number one seems permanently out of reach. "No one will ever be able to realistically compete with China when it comes to subsidies," Neuffer said. "No other government around the world is just going to have an appetite for that."

Coming Up

  • The IPO flurry continues: GoodRx, Corsair Gaming and Bentley Systems are expected to list on Wednesday. Palantir's listing, meanwhile, is now reportedly scheduled for Sept. 29, a week later than previously thought.
  • Tesla's much anticipated Battery Day is on Tuesday, alongside its annual shareholder meeting. Stitch Fix reports earnings the same day.



Stronger care … from more efficient operations

In a defining moment for healthcare, it's even more crucial to deliver patient-centered care efficiently. At Philips, we are committed to providing intelligent, automated workflows that seek to improve patient care. More efficient healthcare means stronger, more resilient healthcare.

Learn more.

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